Mid-Quarter Update: Tightening Credit

Credit conditions are tightening in both Europe and the United States. Our analysis follows in our mid-quarter update, Tightening Credit.

1. Summary

-Credit conditions in both Europe and the United States tightened significantly recently.

-We had our AI engine review the European Central Bank Euro Area Bank Lending Survey and the Federal Reserve Senior Loan Officer Opinion Survey.

-In Europe, credit conditions tightened more than expected in the first quarter, though they are down some from the peak in the third quarter of last year. Banks widened margins on loans, increased rejections, and experienced reduced demand. This played out in all four major European economies. Respondents reported tightening monetary policy was impacting their lending standards and the demand for credit, and also negatively impacting profitability. This clearly represents a headwind to growth in the Eurozone.

-In the United States, banks reported tightening standards and reduced demand for all types of loans. commercial & industrial, auto, and consumer loan standards continued to tighten, representing a headwind to consumer spending. But, the biggest increase in lending standards and the biggest drop in demand came in the commercial real estate sector. Overall, the top reasons given for the tightening of credit standards were: less favorable or more uncertain economic outlook, reduced tolerance for risk, deterioration in collateral values, and concerns about funding costs.